By: Janus Henderson Investors
Harvest Exchange
August 15, 2017

Desirable Dividends

As the world population ages, finding sustainable income has never been more critical for some investors. Fortunately, the need for sustainable income coincides with companies’ recognition of the appeal of a growing and sustainable dividend. Editor Heather Farmbrough of Citywire discusses with Ben Lofthouse, Global Equity Income Portfolio Manager.

The need for investors to find sustainable sources of income has arguably never been greater. The world’s population is becoming increasingly old: according to the United Nations World Population Ageing Report 2015, by 2050, for the first time ever, there will be more people over the age of 60 than young people 10 to 24 years of age.

For investors seeking income, while protecting or potentially growing their capital, it is a challenging time. Rates of return on cash and fixed interest are close to their lowest-ever levels and investors remain nervous in the face of global political and economic uncertainty. Although inflation in headline terms is low, it is rising, as Ben Lofthouse, Global Equity Income portfolio manager, observes, and this will cut into peoples’ real investment incomes.

“Many people have been worried about equity markets since the global financial crisis but the biggest crime has been not being invested,” Lofthouse says. “We’ve all done it – we’ve all waited for the dip to buy – and in the current environment, that’s very harmful for investors who want income, because we’re not being paid to wait. So, the problem is, how do you approach finding income?”

Knowing where to look

“The good news,” he continues, “is that firms offering a good level of dividend yield, such as financial services, are on a low P/E multiple¹ with a good level of income and cash generation. The market is being quite rational, which isn’t always the case. One of the worst things for equity income investors is when everything is expensive.

“Dividend growth is very good on a stock-by-stock basis; last year, mining firms struggled to grow their dividends but this was offset by financial services, technology and housebuilders lifting their dividends.”

Lofthouse and his colleagues on Janus Henderson’s Global Equity Income Team concentrate on identifying companies around the world whose cash flow and retained earnings will allow it to go on paying an income to investors. Taking a global view means having the ability to avoid those corners of the world where local conditions are less favorable – for instance, some utilities in the UK are currently less attractive than elsewhere due to political pressure to keep price increases down.

Lofthouse is less concerned with making predictions about companies or economies than ensuring that a company has a safety margin if things do not go as planned. He looks at factors like balance sheet strength, dividend payout ratio – the percentage of net income that is distributed to shareholders in the form of dividends – and low volatility of earnings. He adds: “Dividend growth tends to be more stable than earnings growth, so at times dividends may not grow as much, but on the flip side, at more difficult times, they likely won’t fall as much as earnings.”

The Janus Henderson Global Dividend Index (JHGDI) February 2017 report illustrates the validity of a global approach in other ways. While global dividend growth in 2016 was disappointing, particularly in North America and the UK, there was nevertheless strong dividend growth in Europe and the Asia Pacific region.

The JHGDI is a long-term study into global dividend trends by measuring the progress that the 1,200 largest global firms by market capitalization are making in paying investors an income on their capital. View the latest JHGDI report.

The index helps to assess future income flows and corporate dividend policies as well as identify where there have been geographical changes. For example, in France, which is the biggest dividend payer in continental Europe, the banks have been returning to health; they increased their payouts by 53% compared with 2015, equivalent to an extra U.S. $2.8 billion.

Why it pays to pay dividends

More and more companies are recognizing that a strong, sustainable and growing dividend policy helps to attract long-term investors who will form a stable shareholder base. In 2016, the world’s listed companies paid out over U.S. $1.15 trillion in dividends, according to JHGDI.

Reinvested dividends are responsible for a considerable part of the performance that comes from long-term equity investment. Research indicates a positive correlation between companies that can offer investors a rising dividend income stream and long-term capital performance. These companies may not have the highest yielding shares, but their underlying growth prospects and cash flow can make them a more reliable proposition for investors than higher yielding companies whose dividends are less sustainable.

Originally Published at: Desirable Dividends